Oil and petrol prices, inflation perceptions, and inflation expectations: evidence from New Zealand

Abstract

I use a structural vector autoregression model to analyse the links between oil prices, petrol prices, inflation, inflation perceptions, and inflation expectations in New Zealand. Findings reveal that although inflation expectations are sensitive to shocks to oil prices, petrol prices, and inflation itself, they are considerably more sensitive to inflation perception shocks. Shocks to inflation perceptions explain 54% of the forecast error variance in inflation expectations after one quarter and 37% after 18 months. The results underscore the importance of including inflation perceptions in models seeking to account for inflation expectations and their associations with energy prices.